Tax Changes Could Hurt Affordability At High End Of The Housing Market

The new tax law will have the biggest impact on the market for luxury homes such as this one in the Pacific Heights neighborhood of San Francisco.

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Originally published on January 2, 2018 8:14 pm

Kari Pinto and her husband recently retired, and now they hope to trade Iowa — and its harsh winters — for a state with a milder climate.

But the tax bill President Trump signed into law last month has complicated their search for a new home.

"Now we just have another wrinkle in trying to determine where to go, and how much it's going to cost us," she says.

The new tax law is forcing a lot of people to reconsider whether they want to buy a home and how much they can pay, and that could affect housing prices, says Mark Zandi, chief economist at Moody's Analytics.

By the summer of 2019, housing prices nationwide will be about 4 percent less than they otherwise would have been, Zandi predicts. Prices could actually decline for higher-priced homes in parts of the country such as the Northeast, South Florida and the West Coast, he says.

Homebuyers will take a hit in several ways.

Starting in 2018, homeowners can deduct interest on mortgages only up to $750,000. The previous cap was $1 million, with an additional $100,000 allowed for home equity loans. Interest on home equity loans and lines of credit will no longer be deductible.

Not many Americans have mortgages that large, so relatively few will be hurt, says Sam Chandan, associate dean and head of New York University's Schack Institute of Real Estate.

The doubling of the standard deduction on federal income tax will be much more consequential, he says.

"That means that for a lot of people around the country, it just won't make sense to itemize and take advantage of that mortgage interest deduction any longer. So that doesn't really hurt housing directly, but it does take away one of the advantages" of homeownership, Chandan says.

For the first time, homeowners also will face a $10,000 cap on what they can deduct on their state and local taxes. Some 95 percent of homeowners fall below that amount, so the impact of the change will once again be minimal in most places, says Lawrence Yun, chief economist at the National Association of Realtors.

"We don't anticipate too much change for the middle part of the country, where home values are fairly affordable," Yun says.

But in high-tax states such as New York, Maryland, Connecticut and California, many more people will take a hit.

"The homeownership rate is falling in California, because of the unaffordable condition. Now, with the tax reform it will make it even more unaffordable than before," Yun says.

In New York, 20 percent of homeowners pay more than $10,000 in property tax alone. In New Jersey, it's 30 percent.

Capping the tax deduction will make housing more expensive to own at the upper end and could gradually drag down prices in that segment of the market in some places.

"My gut tells me that it's going to have an impact at some level. That is, I think it's probably going to be in the $450,000-plus range," says Richard Wight, owner of Ward Wight Sotheby's International Realty in Manasquan, N.J.

"It's going to have an impact on the disposable income of some buyers, which will in fact impact their qualifications to bid higher than they otherwise might have bid," he says.

That's not necessarily a bad thing, NYU's Chandan notes.

Many economists have long argued that the generous mortgage-interest deductions given by the federal government amounted to an indirect subsidy to home purchases and have distorted housing prices.

"When we subsidize something, when we make it cheaper, we're going to get more of it. And so we get more housing," Chandan says. "That in itself has acted to increase house prices, increased the extent to which we consume housing, has directed resources in the economy into the housing sector and at least on the margin have crowded out investment in other areas."

That means the reduction in mortgage interest and tax deductions may actually benefit the economy in the long run. But for now, some homeowners could see the value of their properties fall.

Copyright 2018 NPR. To see more, visit http://www.npr.org/.

ROBERT SIEGEL, HOST:

Buying a home is about to get more expensive in some places. The tax bill that President Trump signed into law before Christmas contains new restrictions on what homeowners can deduct, how much mortgage interest and property taxes. NPR's Jim Zarroli looks at what that could mean for the housing market.

JIM ZARROLI, BYLINE: Kari Pinto and her husband are recently retired, and they're looking to move from Iowa to a state with a warmer climate. She says the new tax law will limit how much they can deduct on the home they buy, and she's been calling up local tax offices in different states to try to understand what the impact will be.

KARI PINTO: Now we just have another wrinkle in trying to determine where to go and how much it's going to cost us.

ZARROLI: The new tax law is forcing a lot of people to reconsider whether they want to buy a home and how much they can pay. The bill bars homeowners from deducting interest on mortgages bigger than $750,000. Before now, the cap was a million dollars. Real estate economist Sam Chandan says this change probably won't have much of an impact on sales except at the high end. What will make a difference, he says, is the doubling of the standard deduction on federal income tax.

SAM CHANDAN: That means that for a lot of people around the country, it just won't make sense to itemize and take advantage of that mortgage interest deduction any longer. So that doesn't really hurt housing directly, but it does take away one of the advantages.

ZARROLI: Another change facing homeowners is the $10,000 cap on state and local tax deductions. Lawrence Yun, chief economist at the National Association of Realtors, says some 95 percent of homeowners fall below that amount. So the new cap won't have much of an impact on housing prices in most places.

LAWRENCE YUN: We don't anticipate too much change for the middle part of the country where home values are fairly affordable.

ZARROLI: But in high-cost states such as New York, Maryland and California, the impact could be considerable.

YUN: The homeownership rate is falling in California because of the unaffordable condition. Now with the tax reform, it will make it even more unaffordable than before.

ZARROLI: Over time, that could bring down prices at the upper end of the market. Richard Wight owns a real estate brokerage firm in New Jersey where home prices and property taxes are among the most expensive in the nation. He thinks the new law could affect properties costing a half million dollars or more.

RICHARD WIGHT: My gut tells me that it's going to have an impact at some level. That is, I think it's probably going to be in the 450-plus range.

ZARROLI: On the other hand, Wight says housing prices have been pretty strong lately. And with unemployment low, a lot of people still want to buy houses. And they're likely to keep doing so even if it's not as economical as it used to be. Jim Zarroli, NPR News, New York.